Commercial property owners and their tenants can reduce the costs of a fit-out for any business by claiming property depreciation.
There are a few very simple rules which must be considered when a specialist quantity surveyor prepares a tax depreciation schedule. This is because deductions may be claimed simultaneously by both owners and tenants in commercial properties.
- Commercial tenants are able to claim depreciation for any fit-out they add once their lease starts
- At the same time, commercial property owners can claim deductions for any of the plant and equipment items originally found in the property
- If a tenant’s lease demands that the property must be returned to its original condition, the tenant can scrap and write off the remaining depreciable value of removed assets in the financial year of their removal
- If a tenant vacates a building and does not remove the fit-out, the owner may still be able to claim the remaining depreciation for these items
To examine in further detail how depreciation will assist a commercial tenant to reduce fit-out costs, let’s look at a real scenario.
Steve established an administration business in July 2014. He rented out an office building and on commencement of the lease he installed a number of office assets in a fit-out which cost a total of $75,410.
After a visit to his accountant, Steve became aware of his eligibility to claim depreciation for any fit-out installed within his business. On advice from his accountant he contacted a specialist quantity surveyor to arrange a tax depreciation schedule.
After receiving Steve’s enquiry, the specialist quantity surveyor arranged a detailed site inspection to assess the items which had been added during the fit-out of the property.
Some of the assets installed during the fit-out included new carpets, computers, an enveloping machine, office chairs, a photocopier, workstations, blinds and a complete telephone system including a switchboard.
The following table provides a summary of the items found, their cost and the first full year depreciation deductions the owner could claim.
The depreciation deductions in this case study have been calculated using the diminishing value method of depreciation. It applies both immediate write-off to assets which cost $300 or less and low-value pooling to assets which cost $1,000 or less. The deductions have been calculated based on a business which has an aggregated turnover of over $2 million.
As the example shows, the tenant of this property could claim a first-year depreciation deduction of $24,405 for assets installed during the fit-out of the property. Claiming depreciation would have a significant impact on reducing the tenant’s tax liabilities and help them to recoup some of the costs involved in installing these assets.
Meanwhile, the owner of the property can also claim deductions for pre-existing assets that may exist. For example, the building is likely to contain toilets, door closers or air-conditioning units among other assets that may have existed prior to the building being leased.
It’s important to note that if a business has an aggregated turnover of less than $2 million it will be classed as a small business entity, which will impact the deductions claimed.
In general, small business entities can claim an immediate write-off on assets which cost $1,000 or less and any item over $1,000 can be claimed as a 15 per cent deduction in the first year and 30% deduction for each year after.
There are also exceptions which apply to assets purchased and installed between July 1, 2012 and December 31, 2013. For tenants or commercial property owners who purchased assets between these dates an immediate write-off can be applied for most depreciating assets which cost $6,500 or less and most other assets can be pooled at a rate of 30 per cent.
A detailed tax depreciation schedule for both the commercial property owner and their tenant will help them to ascertain the deductions which apply for both parties and ensure that deductions are claimed at the correct depreciation rate based on date of installation.